Startups Using ‘Crowdfunding’ Might Become Much More Common

The old saying that it takes money to make money is never truer than it is for the small business owner. When an entrepreneur sits down to craft a business plan and create a budget, in the beginning the side of the ledger with the red ink is usually far longer than the one with the black.

To get rolling on your business idea you are going to need funding. For the startup, traditionally bank loans and wealthy friends or family (if you’re lucky enough to have any) are your main avenues for cash. These days venture capitalists have drifted towards funding more established companies, which often leaves startups flailing to find “seed” capital. That all could change with the rise of “crowdfunding” and business legislation recently passed by the U.S. Congress that would ease barriers for startups to raise money.

What is crowdfunding?

Crowdfunding is a means of raising money by submitting an idea on the Internet to a vast pool of investors who are just regular Joes. You toss an idea into the pool, ask for money to make it happen, and people can decide to help fund your project in exchange for a piece of the potential profits.

Currently, the SEC forbids companies from publicly advertising for investors and will only allow private equity investment from accredited investors with $1 million or more in assets. This leaves many startups without many avenues to find investors. Under the Jumpstart Our Business Startups (JOBS) Act (so far passed by both the U.S. House of Representatives and the Senate and on its way to President Obama’s desk for his signature), crowdfunding would become a legal way for a startup to raise a significant amount of money from lots more people.

One element of The JOBS Act will allow companies to raise up to $1 million from crowdfunding without having to report it to the SEC, or up to $2 million if the company provides the investors with audited financial statements. Individual investors may only invest $10,000 or 10% of their annual income, whichever is less.

Is crowdfunding right for your business idea?

You’ll find many experts who argue both for and against the practice, so entrepreneurs should approach the idea with caution. You probably don’t want to put your great business idea out there to just anybody without consulting an attorney and protecting your intellectual property. Also, funding your company in this manner takes away the benefits you get from more established investors — namely seasoned and experienced business advice and guidance.

Crowdfunding Websites

To learn more, you can visit several existing “crowdfunding” sites such as Indiegogo and Kickstarter, which are already funding projects on a smaller scale (such as making films or building a specialized bicycle). Now that the JOBS Act is on its way to becoming law, and if significant protections put in place to guard against fraud are effective, these sites and others like them will likely be bombarded with entrepreneurial investment opportunities.

The startup world might soon get a whole lot bigger.

(*Please note, we at ChooseWhat.com are not legal or investment experts. We strongly advise you consult an attorney or financial expert before taking any action based on this article.)